There is a general feeling that the global slowdown is gaining momentum. Weak data (including manufacturing and trade) from the US, UK and EU and uncertainty from Asia indicates a period of subdued economic growth. With disinflation returning to the forefront, we anticipate the BoJ and ECB to expand easing activities while the Fed and BoE delay the timing of the first rate hike. The next few months in FX we expect range trading in the G10 while EM should improve.
USD
The weak US payroll report showed disappointing employment growth has pushed expectations for Fed “liftoff” until 1Q 2016. The overall report was significantly weaker than anticipated, as the softness in payroll employment growth and hours worked indicated a broader deceleration in US activity. This read signals that the FOMC has missed the opportunity to raise rates in December, based on economic data. However, since the FOMC is no longer working off a quasi-mechanical mandate any decision feels arbitrary.
The release of the highly anticipated September rate decision minutes will be scrutinized as the decision was controversial and few Fed members came out with strongly hawkish rhetoric right after the pronouncement. US trade balance will be interesting to see further decline in exports as indication of global slowdown. We anticipate USD to linger against G10 until some type of resolution can be found. With an increasingly likely March 2016 launch, EM currencies should see renewed demand as high yields will attracted risk seekers.
GBP
UK's weak September PMIs highlights our expectations of a further slowdown. UK composite PMI dropped to 53.3 from 55.2 and services PMI also declined to 53.3 from 55.6. Given the UK reliance on the service sector, the fall in equity markets was likely to have had a deeper impact on the economic activity than GBP weakness. In addition, soft demand from EM will likely sustain the downwards pressure while consumer spending’s boost from lower oil prices is expected to diminish. Should this week’s industrial production disappoint from the consensus 0.3% rise, watch for further selling in GBP. The BoE meeting will likely be a nonevent with unchanged policy and only one dissenting vote for a hike.
JPY
The BoJ meeting should provide us with some credible indication of how policymakers will respond to re-established disinflation impulse and return of USD weakness. In Japan there are clear signs that growth and inflation is slowing which should provide justification for additional easing. While we would not discount a proactive move from the BoJ we still expect an April 2016 expansion of easing measures. An unexpected fall of USD/JPY to 115 would pull this view forward. We remain bearish on JPY on expectation of easing and use of JPY as a funding currency.
CHF: Deflation Set To Continue
Times are tough, even in Switzerland. Almost nine months on it is clear that the Swiss economy is still digesting the SNB decision to abandon the EUR floor. Recent data has been coming in mixed; for example August retail sales contracted and purchasing manager’s index surprised to the downside in September. Furthermore, the CHF is still seen as overvalued.
However, we think it’s likely for the EUR/CHF pair to break the 1.1000 level again. The market is driven by volatility, as global uncertainties remain strong and risk-off sentiment is only set to grow. It’s our view that the US Federal Reserve is sending a strongly negative signal by delaying its rate hike. U.S. recovery looks unsustainable and traders are starting to price the end of the zero interest-rate policy by 2017. Commodities and safe-haven countries may be targeted in the near future.
Even considering the deceleration of the Swiss economy, it still remains a port in the storm. As we anticipated, the weakening of the Swiss franc, which we have seen over the past three months, did not have a major impact on the inflation data that have been released today. The CPI printed at -1.4% year-on-year. The Swissie remains strong and the downside pressures on the price of imported goods are still important. Of course, what we are now wondering is what if the ECB’s quantitative easing program does not deliver the expected results?
EUR/CHF - Bearish Pressure
The Risk Today
EUR/USD is moving along the direction implied by the upside trend line. However, the bearish momentum is still strong. Support can be found at 1.1087 (03/09/2015 low). Stronger support lies at 1.1017 (18/08/2015 low). Hourly resistance can be found at 1.1330 (21/09/2015 high). In the longer term, the symmetrical triangle from 2010-2014 favored further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). We remain in a downside momentum.
GBP/USD is still trading between the 50% and the 61.8% Fibonacci retracement. Hourly support can be found at 1.5087 (05/05/2015 low). Stronger support can be found at 1.4960 (23/04/2015 low). Hourly resistance can be found at 1.5659 (27/08/2015 high). In the longer term, the technical structure looks like a recovery. Strong support is given by the long-term rising trend-line. A key support can be found at 1.4566 (13/04/2015 low).
USD/JPY is still moving sideways. The pair is still moving around the 200-day moving average. Hourly support is given at 118.61 (04/09/2015 low). Stronger support can be found at 116.18 (24/08/2015 low). Hourly resistance can be found at 121.75 (28/08/2015 high). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).
USD/CHF is still holding below resistance at 0.9844 (25/09/2015 low). The technical structure still shows an upside momentum. We remain bullish in the medium-term. In the long-term, the pair has broken resistance at 0.9448 suggesting the end of the downtrend. This reinstates the bullish trend. Key support can be found 0.8986 (30/01/2015 low).
Resistance and Support
